Stock-Picking by Mutual Funds: Evidence from Their Trades in Family-Controlled Firms

53 Pages Posted: 17 Feb 2015 Last revised: 18 Jan 2021

See all articles by Jing Xie

Jing Xie

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: January 15, 2021

Abstract

Mutual funds on aggregate tilt their portfolios away from publicly traded family-controlled firms and they realize a lower return on these stocks compared to corporate insiders. In the cross-fund analysis, I find that active equity mutual funds that invest heavily in family firms (i.e., pro-FF funds) outperform other funds. Consistent with an informed fund hypothesis, pro-FF funds generate higher returns on family firms than other funds. In addition, pro-FF funds’ trading better predicts family firms’ stock returns and earnings announcement surprises than other funds’ trading. Pro-FF funds’ outperformance is greater before SOX in 2002 and when investing in opaque family firms. Finally, pro-FF funds acquire superior performance by investing in family firms geographically closer to the funds. Overall, the paper shows that family firms’ stock return overstates the actual return of mutual funds on these stocks and some mutual funds possess superior investing skills specific to family firms.

Keywords: Mutual funds; Investment Skills; Family Firms

JEL Classification: D11, D23, G11, G23, G32

Suggested Citation

Xie, Jing, Stock-Picking by Mutual Funds: Evidence from Their Trades in Family-Controlled Firms (January 15, 2021). Asian Finance Association (AsianFA) 2015 Conference Paper, Available at SSRN: https://ssrn.com/abstract=2565316 or http://dx.doi.org/10.2139/ssrn.2565316

Jing Xie (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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